It’s a mad, mad portfolio world

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It's a mad, mad portfolio world: Aggregators drive pricey premiums

Portfolio sales are up 60 percent from one year ago as aggregators build scale. With demand for A-product outpacing supply by 4 to 1, pricing is extremely competitive and portfolio premiums are being had for large-scale, multi-city or primary market packages. These premiums well-exceed single asset prices.

​Market fundamentals continue to support aggressive underwriting for industrial portfolios as 'aggregators' pursue opportunities to build scale. This is leading to big deals, which is escalating momentum: year-over-year portfolio transactions have increased more than 60 percent, with ten portfolios exceeding $100 million closed in the third quarter of 2013 alone. IndCor, Industrial Income Trust and Liberty Property Trust are among the recent aggregate-buyers.

Investor demand exceeds Class A supply by 4 to 1, creating an extremely competitive pricing environment, while the portfolio premium for a large-scale, multi-city or primary market package largely exceeds single asset prices.

Consistency rules: Transaction-sizing has been between $75-150 million, and is contingent on the functionality, size and occupancy of the assets. Most buyers want homogenous product, with the homogeneity applying to three facets of the offering:

Geography: portfolios comprised of facilities in the same market or submarkets are in high demand.

Product type: investors see value in portfolios comprised of the same building types and building uses, such as data centers, specialized manufacturing facilities, industrial warehouses and distribution centers.

Investor profile: acquisition strategies vary across the industry, whether it is specializing in value-add properties, developing build-to-suit and speculative assets or investing primarily in stabilized, fully leased Class A offerings.

Class A, single-product-type groupings are the most marketable and are easiest to finance with long-term debt. They can command a pricey premium of roughly 5-10 percent. Investors, in this cycle, are seeing immense value in the industrial asset class, which offers little risk, and – as market fundamentals continue to improve — notable gains.

Functional Class B portfolios in core markets can also fetch a slight premium of 3-5 percent, but typically experience higher variance in pricing due to investors searching for greater yields. Investors generally prefer Class A product in a secondary market over B or lower-grade assets in a primary market.

If a portfolio has several property types, investors will treat the offering as a menu of sorts – and sometimes cherry pick those properties most relevant to their acquisition synergies. Sellers, as a result, will have to be realistic with pricing and accept not all product may sell as a complete portfolio. This will require greater resources and creativity to finance and complete a deal.

Our take: The puzzle pieces may be worth the picture in 2014 as the number of desirable portfolio offerings narrows. Single property trades are expected to progressively increase.

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